To hear managing partners tell it, navigating a recession is so 2009.
The latest Managing Partner Confidence Index put out by Citi Private Bank Law Watch Thursday shows dramatic increases in the confidence level of law firm leaders for 2010 when it comes to client demand, revenues, profits, staffing and other metrics that took a tumble last year.
Pennsylvania firms are no exception, the director of Citi's law firm group in Philadelphia said.
"As you can expect, there were a lot of sighs of relief as they closed their year end," Lisa Kohut said of the state's law firm leaders.
And that wasn't just because 2009 was behind them, but because it ultimately didn't turn out that bad. Kohut said firms had good years financially and for the most part came in on budget. That was helped, she said, by conservative budgeting for 2009 as well as the cost-cutting measures firms took last year.
Firm leaders are hopeful that might mean increased profits for 2010 as things stabilize, but Kohut said there is a question of whether things will ever get back to where they were. This year will be a game of taking efficiencies into account rather than relying on hourly rate increases, she said.
One area where firms might have to go back to the cost-cutting measures of 2009 is when it comes to equity partner ranks. The survey shows firms are happy with their associate ranks and may even grow them. But few firms dabbled with cutting equity partners in 2009 and might not be able to avoid doing so in 2010, Kohut said.
According to the survey administered in the fourth quarter of 2009, the overall confidence index of managing partners is the highest it has been in two-and-a-half years and is back where it was in the third quarter of 2007. Citi attributes this rise in confidence to an expected rise in work demand. About 64 percent of the respondents said they expected demand to grow over the next 12 months and 23 percent said it would stay flat. The demand index, as Citi dubs it, is the highest it has been in two years. The majority of firm leaders said they expect an increase in billable hours in the next year.
"Along with bankruptcy and restructuring -- which have been busy since the start of the downturn -- litigation is finally starting to pick up this quarter, and there's even some activity on the transactional front," Citi said in the executive summary of its survey results.
While 65 percent of respondents also think a rise in revenue will accompany that rise in demand, the confidence levels in those two categories are not as aligned as they typically have been in prior surveys. Managing partners aren't as confident in revenue increases as they are in demand going up. Citi attributes this to continued pressures to discount fees or implement alternative arrangements.
Local firm leaders are eyeing a potential economic recovery cautiously, though they have seen an increase in work flow.
Blank Rome managing partner Carl M. Buchholz said the firm saw an increase in demand in the fourth quarter of 2009. He said he is cautiously optimistic about 2010 but said there would be continuing challenges for the year.
Buchholz said the plan is to continue with prudent management and focus on the top-line revenue.
Reed Smith Philadelphia office managing partner Ajay Raju said the recession provided the firm with opportunities not only to become more lean and efficient internally, but also to do work that isn't available in a boom year.
He said he thinks the first half of 2010 will look a lot like the last half of 2009 and a recovery will start to show its face in the second half of this year. He said it may not be quite the recovery some are anticipating, describing it as a "U-shaped" recovery with a wide bottom. Raju said he is seeing an uptick in demand, but it's still hard to tell whether that is a "steroid effect" from government infusion of cash in certain industries.
"The patient has been loaded with medicine and we don't know if we're feeling good because we are high on medicine or because we are feeling better," he said.
Raju said he disagrees that overall demand on a macro level will be significantly higher and said it may actually be lower because more providers -- like legal processors and outsource companies -- are entering the market.
And as firms move to a more efficiency-based model, the demand may be there, but there is pressure to do the work in less time. He said firms will have to look away from hours billed and more toward the value they are providing while being flexible with fees. They will have to train their associates, maximize the use of technology, implement project management and train their leaders, he said.
MORE ON THE RESULTS
Citi's survey also shows firms don't expect to conduct any more layoffs, and 45 percent said they expect to hire associates. Indices for equity and non-equity partners as well as associates all broke into positive territory last quarter, which Citi said suggests flat or increasing headcount for the next 12 months.
According to the survey results, 43 percent of firms expect to increase their equity partner ranks despite Kohut and other consultants' predictions that those ranks will be culled this year. About 25 percent of the respondents, however, said they would cut the equity partner tier, mostly by 3 percent or less.
"Predicted associate headcount levels are now in front of equity partner levels, suggesting that leverage will be up in 2010," according to the executive summary.
Respondents are also expecting expenses to remain flat in the next year. That helped bolster profit expectations, with about 66 percent of respondents predicting profits will grow by an average of 5 percent in the next year. The survey showed 7 percent of respondents expected profits to decrease in 2010. Demand is by far the driver of the profit expectations, with 83 percent of the respondents pointing to that as a factor.
Firms are still being cautious as they continue in recovery mode. The survey showed expansion plans are modest for the next year with just 13 percent of managing partners reporting plans to open a foreign office in 2010 and another 12 percent who said they would open a domestic office.
While 22 percent said they plan to add office space, 3 percent said they planned to close a foreign office and 25 percent of the respondents said they would reduce space in existing offices.
The confidence in a more stable legal industry stems from overall confidence in a global economic recovery.
Most respondents said they felt the broader economy was on the road to recovery, with 64 percent saying the global economy is better than it was six months ago and 62 percent predicting it will further improve over the next six months.
Slightly more than 50 percent said the legal market has improved in the last six months and 61 percent said it would grow somewhat stronger in the next six months.
